Councilman: SEDC-style fraud could be taking place in other agencies

Fraudulent management practices by the Southeastern Economic Development Corp. could be taking place in other city departments and agencies, a San Diego City Councilman said today.

Tony Young, who pushed for an audit of the SEDC, said the money involved

with the troubled redevelopment agency was peanuts'' compared to other

large city agencies and departments.

"(Fraud) is not just here, it's not just the SEDC,'' Young said at a meeting of the City Council's Audit Committee. It's human nature and shows what will happen when you don't pay attention.''

The audit of the SEDC, released last week, found that outgoing President Carolyn Smith awarded herself and other agency executives bonuses and extra salary that were not authorized.

The audit uncovered a number of other questionable practices, said Denise Callahan of Macias Consulting Group, who formally presented the study to Audit Committee members.

The report shows a need "for immediate and comprehensive reform'' of the SEDC and should send a clear message to other city departments and agencies that they were expected to perform at a high level, said Kevin Faulconer, the committee chairman.

The audit came at the same time that investigations are ramping up for the Centre City Development Corp. - the city's downtown redevelopment arm - the former president of which faces a misdemeanor conflict of interest charge for allegedly accepting money from a developer that had a branch doing business with the city.

Committee member Toni Atkins said a follow up audit of the once-troubled Data Processing Corp. was imminent. That examination will measure progress made by the DPC in enacting recommended reforms.

Callahan told members of the committee that the audit found $872,000 of unauthorized cost-of-living adjustments, incentive payments, and one-time salary hikes over five years.

The SEDC dipped into salary savings that resulted from employee terminations and resignations in order to hand out the bonuses, in such a way that they would not be apparent to city officials, Callahan said.

Callahan said the audit also found that the SEDC had poor systems to measure progress toward goals, that staff has limited communication with the board of directors, and no transparency in the selection of 71 retained consultants.

She called the various management controls in place at the SEDC the "lowest'' of any redevelopment agency her firm has audited, and that it performed its role poorly.

Young said he knew something was wrong with the agency, which is tasked with redeveloping areas east of downtown.

"If you go through my community, investors and developers see that area as a good place for redevelopment, but those areas were not being redeveloped accordingly,'' Young said. "The SEDC was underperforming. Now, seeing this audit, it's pretty clear why the development was not getting done.

"You had a board that was not engaged. You had management that took advantage - they probably encouraged the board to not be engaged,'' the councilman said.

The city council and mayor's office should have kept a closer eye on the SEDC, Young said.

The audit contains 33 recommendations, including revamping SEDC's governance structure, hiring a chief financial officer and requiring that presidential pay increases be approved by the board.

City Chief Financial Officer Jay Goldstone said Mayor Jerry Sanders agreed with all the recommendations and would ask them to be passed by the city council and SEDC board.

One recommendation calls for recovery of lost money.

"We fully concur with that,'' Goldstone said. "The mayor has had discussions with the District Attorney to see if it rises to that level.''

Sanders has so far replaced five of the eight members on the SEDC board, including its former chairman.

One of the new board members, Richard Lawrence, told Audit Committee members that his new responsibilities "become more daunting by the minute.''

The report suggested that members of the SEDC board will not always be able to depend on its staff, Lawrence said.

Smith has been fired by the SEDC board - effective Oct. 21 - but is slated to get more than $100,000 in severance pay. City Attorney Michael Aguirre has sued her to recover some of the money.

The audit found that Smith had an annual budgeted salary of $180,000, but was actually paid $261,393 last fiscal year.